When you decide it’s time for you to buy a home, especially when it’s your first one, there are plenty of important details you need to know that can save you a large amount of time, money, and problems if you just take the time and effort to pay attention to the details and use a little common sense.
I’m convinced that one of the main reasons so many people have been foreclosed on and are struggling is because they failed to use some of these common sense rules when they purchased a house and they ended up in financial trouble because of it. The upside is that now there are some awesome bargains out there at the moment due to the huge numbers of foreclosures and short sales that have happened over the last few years.
It’s definitely a buyer’s market.
So what are some of the things you really should do when you’re buying a house to make it a smart financial decision? Let’s check it out:
- Figure Out How Much House You Can Afford– Most experts recommend having a mortgage payment of no more than 30-33% of your gross monthly income, but I think that 25% is a much more reasonable amount and ends up serving you better in the long run to keep from stretching your budget to the max.
Never, ever trust the bank or mortgage company tell you how much house you can afford. Their job is to tell you how much they will approve for you to borrow, which is usually much more than you should actually spend. So be careful, just because you’ve been approved for a certain amount doesn’t mean you should spend that much.
- Get Prequalified– Once you’ve decided how much you can comfortably afford to spend on a house, take the smart step of getting prequalified for a mortgage. That way, when you find a house that you like, the seller knows you’re serious. When you already have financing in place you’ll be much more likely to close in a timely manner without any delays from the bank because of the sometimes tedious process of getting financing for your purchase.
- Choose the Right Mortgage– The shorter the term the better. Why? Because you save money on interest. Buying the same house with a 15 year mortgage versus a 30 year mortgage will save you tens of thousands of dollars over the life of the loan Plus you’ll only have 15 years of mortgage pain as opposed to 30. It’s not about how much the payment is, it’s about how much interest you have to pay over the life of the loan.
Also, choosing a fixed rate mortgage is smartest. If you choose an adjustable rate you are basically gambling. You cannot predict the future, and when you try to, you will get burned. Besides, we’re seeing historic low rates right now, so where do you think the rate is more likely to be in a few years when it comes time for your variable rate mortgage to adjust? Yep, probably higher.
Don’t gamble when you buy a home!
- Have a Substantial Down Payment– The higher the down payment you put down, the better position you’ll be in overall. Having a sizeable down payment helps to keep you from ending up under water (when your house is worth less than you owe on it) if housing prices fall. Also, if you put down 20% or more you can avoid having to take out private mortgage insurance (PMI) that will make your payment even higher. Plus, having a larger down payment helps to prove to yourself and your lender that you are financially responsible enough to take on a house payment, because it takes discipline to save that much money. I always recommend at least a 20% down payment. Of course, the best way to buy a home is to pay cash in full, but I know that’s just not feasible for most people.
- Get a Professional Realtor– a realtor is a trained real estate professional. A good realtor will always take the time to educate you about the process of buying a home, about the market where you want to buy, and about how to buy wisely. A really good realtor can sometimes be hard to find, so make sure to find a professional that comes highly recommended by friends, family, coworkers, etc. If you choose just any realtor, thinking they’re all the same, you might get a realtor that cuts corners ethically, doesn’t keep you updated on the market, doesn’t answer phone calls in a timely manner, or otherwise take good care of you. Remember, these are service professionals and you should expect excellent service when you hire a real estate professional.
- Compare Prices– A good realtor should be able to help you with this. You want to compare the price of houses in the area where you’re looking to make sure you don’t end up overpaying. Houses in the same general area can vary widely according to size, condition, amount of land, and other factors. Your real estate agent should be able to assist you in navigating through these waters to make sure you spend the right amount of money on the right property and negotiate the right price.
These first six things you should do before buying a house are going to help ensure that you buy wisely and keep yourself protected as much as possible from anything that can damage you financially for years to come.
But wait! This is only the first part. I have six more tips coming up in my next post that are just as important and will round out everything you need to know when it comes to buying a house using smart financial principles.
So stay tuned for more soon…